The risks shaping us

FNB Comment, by Cees Bruggermans

Our interest rates are being kept unnecessarily high by massive tax increases imposed through public charging and excessive unionized labour demands, keeping both our inflation and inflation expectations overly elevated.

Vastly better public sector governance and less rigid labour market conditions would have lowered our inflation rate and expectations further by 1%-3% and made the outlook less risky.

That would have warranted a prime rate near 7%-8%. Instead, we are stuck at 10%.

Despite these heavy domestic millstones around our necks, these aren’t the only influences shaping us.

SARB MPC decision on the repo rate

The [SA] Monetary Policy Committee decided to leave the repo rate unchanged at 6,5 per cent per year.

SARB Monetary policy stance: The assessment of the Monetary Policy Committee is that inflation is likely to remain within the inflation target range over the forecast period, and that the economy is expected to continue on a recovery path. The risks to the inflation forecast are seen to be more evenly balanced than at the previous meeting of the MPC. The main risks to the inflation outlook emanate from administered price developments and from the risks emanating from the global economy. The domestic growth outlook will continue to be affected by the global developments. The MPC will continue to monitor these developments closely.

For these reasons, the MPC deems it appropriate to maintain the current stance of monetary policy. Accordingly the repurchase rate remains unchanged at 6,5 per cent per annum.

Inflation slows to 5.1% in March

The Consumer Price Index (CPI) was up 5.1% year-on-year in March, data released by Statistics South Africa showed today.

This was down from 5.7% in February.

CPI was at 0.8% month-on-month from 0.6% in February.

CPI was expected to have registered 5.1% year-on-year, according to a survey of leading economists by I-Net Bridge.

Interest rate cut next week?

The rand’s rally to a 2½ -month peak against the dollar has raised the odds of an interest rate cut at the Reserve Bank’s policy meeting next week, although most analysts believe rates will be kept steady.

Comments yesterday from one of the Bank’s deputy governors, Renosi Mokate, who spoke about the effect of capital inflows on the rand, added to the speculation.

The rand has appreciated more than 3% since the last monetary policy committee meeting (MPC). It was trading at R7,29 to the dollar late yesterday after touching R7,27/ earlier in the week, its firmest since January 5.

Extremely low interest rates in developed countries were prompting investors to put their money into emerging economies to take advantage of higher yields, she told a leadership conference.

Press opinion: If the debate is real, it's dangerous

The ANC's decision to review the mandate of the Reserve Bank

Ever since the balance of power shifted in the tripartite alliance, President Jacob Zuma has been careful to be seen to allow the expression of diverse opinions on economic policy, particularly from the ANC's two formal allies, trade union federation Cosatu and the SA Communist Party. After all, no harm can be done by talking about things - or can it?

When finance minister Pravin Gordhan presented his first medium-term budget policy statement in October, he was able to talk tough on spending (which the ANC's allies always want more of) because of the expected fall in tax revenues and the sharp rise in the projected budget deficit. But he seemed to compensate by saying that "alongside inflation reduction and financial stability, we must seek faster development and employment creation. I welcome public debate on this issue." Gordhan also said he had agreed with Reserve Bank governor Tito Mboweni and governor-designate Gill Marcus that "monetary policy should also support our aim of balanced and sustainable growth".

So what exactly can it mean to say that the Reserve Bank mandate will be reviewed? What more is wanted?

It's true that the Bank regards its primary goal as "the achievement and maintenance of price stability". It also maintains that SA "has a growing economy based on the principles of a market system, private and social initiative, effective competition and social fairness".

There's a lot there that can be assumed to be ideologically provocative to the SACP (which, not surprisingly, still believes in communism) and Cosatu (which remains committed to socialism). But what would they change? Would they say that price stability (and therefore the control of inflation) should not be the primary goal? Do they reject the role of markets?

The policy of inflation targeting tends to inflame tempers on the Left, but it has not been rigidly applied. While there are arguments for raising the target band from its present 3%-6%, to abandon the concept would send a signal that inflation is to be encouraged. Quite apart from its other destructive effects, on both the economy as a whole and on investor confidence, high inflation would be a terribly punitive tax on the poor and the aged. That is the last thing we need in a country where so many are unemployed and so many survive on meagre social grants and old-age pensions.

Yet Cosatu and the SACP do not want play-play discussions and they will not enjoy being thrown sops. The "review" of the Bank's mandate should be seen for what it is: an attempt to change economic policy through the back door.

Extracted from Financial Mail editorial